Sharīʽah Challenges in Stock Custody: A Case Study of PSX

Abstract

The custody of stocks is a fundamental aspect of stock trading operations in financial markets, ensuring the safekeeping, administration, and efficient transfer of ownership. In the Pakistan Stock Exchange (PSX), the Central Depository Company (CDC) oversees this process through its Central Depository System (CDS), which facilitates electronic record-keeping and ownership transfers. While this system enhances security and operational efficiency, it also presents several Sharīʻah concerns that warrant critical examination. One key issue is the distinction between beneficial and legal ownership in the depository system. While investors hold stocks in their names, the actual control and management of these stocks often rest with the Central Depository Company (CDC), raising concerns about the investor’s true ownership rights under Sharīʻah. Additionally, stocks that are Sharīʻah-compliant at the time of purchase may later become non-compliant due to changes in a company’s financial activities, such as increased interest-based earnings or impermissible business engagements. This raises questions about the investor’s responsibility upon such transitions, including whether they must sell these stocks immediately and how they should handle any dividends or capital gains earned during the non-compliant period. Another significant issue is the Zakāt obligation on stocks, particularly whether stocks should be classified as trade assets (subject to annual Zakāt) or long-term investments (potentially subject to Zakāt only on dividends). Lastly, issue of stockholder liability whether it remains limited to their investment or extends to personal assets. While AAOIFI and the International Fiqh Academy support limited liability for transparency and investment facilitation, some scholars argue for unlimited liability based on the principle of al-kharāj bi-al-ḍamān. By analyzing these aspects in light of Islamic jurisprudence, this paper identifies gaps in current custody practices and explores possible Sharīʻah-compliant solutions. The study aims to contribute to the ongoing discourse on ethical stock trading in Pakistan by ensuring that custody mechanisms align with Islamic financial principles, ultimately fostering greater confidence among Sharīʻah-conscious investors